oversight

Audit of FEHBP of Advantage Health Solutions, Inc

Published by the Office of Personnel Management, Office of Inspector General on 2009-06-24.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                                                                      . U.S. OFFICE OF PERSONNEL MANAGEMENT
                                                                              OFFICE OF THE INSPECTOR GENERAL
                                                                                               OFFICE OF AUDITS




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                   .,A,lldft·•.,Of,·..th;e .• Federal.• E}ll1pl0y.((.e·~· . ··Health· ,.B.en.efits··•. ~r()gr·a1n. '.
                     . '. ,·Oper~tionsof·1\t1¥~lIltflgelf~~Ith·.SQlutiQ.Il~,···IIl.Ct.···




                                                            . Date:       June 24," 2009




                                                                             ,--:CA UTIQN--+­

                     this &uditrepor't h;Js been dis'ri.buiid toFederal and Doo-Federaioffidals who are respcnsibleIor.the administration or the audited

                   . cuntract, This report may contain proprietary da'aw~ich is protected by Federal law (18.U$.C.1905); therefore, while thlsreport is ..

                     avallableunderthe Freedom oflnformatiQn Act, cautionneeds to be exercised before releasing thereport to the general public.        .

                        UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                          Washington, DC 20415



   Office of the
Inspector General




                                         AUDIT REPORT


                            Federal Employees Health Benefits Program

                         Community-Rated Health Maintenance Organization

                                 Advantage Health Solutions, Inc.

                             Contract Number CS 2862 - Plan Code 6Y

                                       Indianapolis, Indiana




                      Report No. lC-6Y-OO-09-004         Date:    June 24, 2009




                                                            Michael R. Esser
                                                            Assistant Inspector General
                                                              for Audits




        www.opm.gov                                                                   www.lIsajobs.gc>v
                         UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                               Washington. DC 204]5



  Office of the
Inspector General




                                        EXECUTIVE SUMMARY





                              Federal Employees Health Benefits Program

                           Community-Rated Health Maintenance Organization

                                   Advantage Health Solutions, Inc.

                               Contract Number CS 2862 - Plan Code 6Y

                                        Indianapolis, Indiana



                      Report No.   lC-6Y-OO-09~004             Date: June 24, 2009


        The Office ofthe Inspector General performed an audit of the Federal Employees Health
        Benefits Program (FEHBP) operations at Advantage Health Solutions, Inc. (Plan). The audit
        covered contract years 2003 through 2008 and was conducted at the Plan's office in Indianapolis,
        Indiana. This report questions $439,823 for defective pricing in 2005 and 2007, including
        $57,035 for related lost investment income. We found that the FEHBP rates were developed in
        accordance with the Office of Personnel Management's rules and regulations in contract years
        2003,2004,2006, and 2008.

        We determined that the FEHBP rates were overstated by $196,932 for contract year 2005
        because the Plan overstated its capitation increase, charged the FEHBP unsupported benefit
        loadings, and applied retention to the dental benefit twice.

        We determined that the FEHBP rates were overstated by $185,856 for contract year 2007
        because the Plan overstated its capitation increase, charged the FEHBP unsupported benefit
        loadings, applied retention to the dental benefit twice, and did not completely apply a Similarly
        Sized Subscriber Group discount to the FEHBP's rates.

        Consistent with the FEHBP regulations and the contract, the FEHBP is due $57,035 for lost
        investment income, calculated through April 30,2009, on the defective pricing findings.




        www.opm.gov                                                                            www.usajobs.gov
                                      CONTENTS




   EXECUTIVE SUMMARY	                                                                    i


 1.	 INTRODUCTION AND BACKGROUND                                                         1

                             .            .
II.	 OBJECTIVES, SCOPE, AND METHODOLOGY                                                  3


III.	 AUDIT FINDINGS AND RECOMMENDATIONS                                                 5


   Premium Rates                                         r                               5


   1. Defective Pricing	                                                                 5


   2. Lost Investment Income	                                                            7


IV.	 MAJOR CONTRIBUTORS TO THIS REPORT.                                                  8


   Exhibit A (Summary of Questioned Costs)


   Exhibit B (Defective Pricing Questioned Costs)


   Exhibit C (Lost Investment Income)


   Appendix (Advantage Health Solutions, Inc. April 2, 2009, response to the draft report)

                     I. INTRODUCTION AND BACKGROUND


Introduction

We completed an a'udit ofthe Federal Employees Health Benefits Program (FEHBP) operations
at Advantage Health Solutions, Inc. (Plan) in Indianapolis, Indiana. The audit covered contract
years 2003 through 2008. The audit was conducted pursuant to the provisions of Contract CS
2862; 5 U.S.C. Chapter 89; and 5 Code of Federal Regulations (CFR) Chapter 1, Part 890. The
audit was performed by the Office of Personnel Management's (OPM) Office ofthe Inspector
General (OIG), as established by the Inspector General Act of 1978, as amended.

Background

The FEHBP was established by the Federal Employees Health Benefits Act (Public Law 86­
382), enacted on September 28, 1959. The FEHBP was created to provide health insurance
benefits for federal employees, annuitants, and dependents. The FEHBP is administered by
OPM's Center for Retirement and Insurance Services. The provisions of the Federal Employees
Health Benefits Act are implemented by OPM through regulations codified in Chapter 1, Part
890 of Title 5, CFR. Health insurance coverage is provided through contracts with various
health insurance carriers that provide service benefits, indemnity benefits, or comprehensive
medica! services.

Community-rated carriers participating in the FEHBP are subject to various federal, state and
local laws, regulations, and ordinances. While most carriers are subject to state jurisdiction,
many are further subject to the Health Maintenance Organization Act of 1973 (Public Law 93­
222), as amended (i.e., many community-rated carriets are federally qualified). In addition,
participation in the FEHBP subjects the carriers to the Federal Employees Health Benefits Act
and implementing regulations promulgated by OPM.

The FEHBP should pay a market price rate,
                                                                       FEHBP Contracts/Members
which is defined as the best rate offered to
                                                                              March 31
either of the two groups cJosest in size to the
FEHBP. In contracting with community-rated                   3,000
                                                                                               I""
carriers, aPM relies on carrier compliance with              2,500

appropriate laws and regulations and,                        2,000

consequently, does not negotiate base rates.
                                                              1,500
       "l'
OPM negotiations relate primarily to the level                                                         I""
of coverage and other unique features of the                  1,000
                                                                       -         "­

FEHBP.                                                                                                              ,....

                                                                                                     I. J.
                                                                                 "­



The chart to the right shows the number of
                                                               500

                                                                  0    :1.
                                                                       2003
                                                                                 III
                                                                                      2004   2005    2006    2007
                                                                                                                    III
                                                                                                                       2008
                                                                                                                                  ,.
FEHBP contracts and members reported by the            I_ Contracts    604            1,085 1,236    614     518            788
Plan for March 31 of each contract year                IEJMembers      1,459 1,481 2,688 1,292 1,015 1,552
audited.



                                                  1

The Plan has participated in the FEHBP since 200 I and provides health benefits to FEHBP
members throughout most of Indiana. The last audit conducted by our office covered contract
years 2001 through 2005. As a result of that audit, we found that the Plan's rating of the FEHBP
in contract year 2001 was in accordance with the applicable laws, regulations, and aPM rating
instructions. In contract year 2002, we found that there were inappropriate health benefit charges
to the FEHBP, which were then fully reimbursed by the Plan. However, we found that the Plan
could not fully support their rating methodologies in 2003 through 2005; therefore, we did not
issue an opinion for these years with the intent to re-audit those years as part of the current audit.

The preliminary results ofthis audit were discussed with Plan officials at an exit conference and
through subsequent correspondence. A draft report was also provided to the Plan for review and
comment. The Plan's comments were considered in the preparation of this final report and are
included, as appropriate, as the Appendix.




                                                  2

               II. OBJECTIVES, SCOPE, AND METHODOLOGY

Objectives

The primary objectives of the audit were to verify that the Plan offered market price rates to the
FEHBP and to verify that the loadings to the FEHBP rates were reasonable and equitable.
Additional tests were performed to determine whether the Plan was in compliance with the
provisions of the laws and regulations governing the FEHBP.



We conducted this performance audit in                              FEHBP Premiums Paid to Plan
accordance with generally accepted
government auditing standards. Those                          $10
standards require that we plan and perform the                 $8
audit to obtain sufficient, appropriate evidence
                                                               $6
to provide a reasonable basis for our findings
and conclusions based on our audit objectives.                 $4
We believe that the evidence obtained provides                 $2
a reasonable basis for our findings and
                                                               $0
conclusions based on our audit objectives.
                                                        • Revenue
This performance audit covered contract years
2003 through 2008. For these contract years,

the FEHBP paid approximately $35.3 million in premiums to the Plan. The premiums paid for

each contract year audited are shown on the chart to the right.


OIG audits of community-rated carriers are designed to test carrier compliance with the FEHBP

contract, applicable laws and regulations, and OPM rate instructions. These audits are also

designed to provide reasonable assurance of detecting errors, irregularities, and illegal acts.


We obtained an understanding of the Plan's internal control structure, but we did not use this

information to determine the nature, timing, and extent of our audit procedures. However, the

audit included such tests of the Plan's rating systems and such other auditing procedures

considered necessary under the circumstances. Our review of internal controls was limited to the

procedures the Plan has in place to ensure that:


       •	 the appropriate similarly sized subscriber groups (SSSG) were selected;

       •	 the rates charged to the FEHBP were the market price rates (i.e., equivalent to the best
          rate offered to an SSSG); and

       •	 the loadings to the FEHBP rates were reasonable and equitable.

In conducting the audit, we relied to varying degrees on computer-generated billing, enrollment,
and claims data provided by the Plan. We did not verify the reliability of the data generated by
                                                   3

the various information systems involved. However, nothing came to our attention during our
audit testing utilizing the computer generated data to cause us to doubt its reliability. We believe
that the available data was sufficient to achieve our audit objectives. Except as noted above, the
audit was performed in accordance with generally accepted government auditing standards,
issued by the Comptroller General of the United States.

The audit fieldwork was performed at the Plan's office in Indianapolis, Indiana, during
November 2008. Additional audit work was completed at our office in Cranberry Township,
Pennsylvania.

Methodology

We examined the Plan's federal rate submissions and related documents as a basis for.validating
the market price rates. In addition, we examined the rate development documentation and
billings to other groups, such as SSSGs, to determine if the market price was actually charged to
the FEHBP. Finally, we used the contract, the Federal Employees Health Benefits Acquisition
Regulations (FEHBAR), and OPM's Rate Instructions to Community-Rated Carriers to
determine the propriety of the FEHBP premiums and the reasonableness and acceptability of the
Plan's rating system.

To gain an understanding of the internal controls in the Plan's rating system, we reviewed the
Plan's rating system's policies and procedures, interviewed appropriate Plan officials, and
performed other auditing procedures necessary to meet our audit objectives.




                                                 4

              III. AUDIT FINDINGS AND RECOMMENDATIONS


Premium Rates

1. Defective Pricihg                                                                    $382,788 .

  The Certificates of Accurate Pricing the Plan signed for contract years 2005 and 2007 were
  defective. In accordance with federal regulations, the FEHBP is therefore due a price
  adjustment for each year. We applied the defective pricing remedies for the years in question
  and determined that the FEHBP is entitled to premium adjustments totaling $382,788 (see
  Exhibit A). We found that the FEHBP rates were developed in accordance with the
  applicable laws, regulations, and aPM rating instructions in contract years 2003, 2004, 2006,
  and 2008.

  Carriers proposing rates to aPM are required to submit a Certificate of Accurate Pricing
  certifying that the proposed subscription rates, subject to adjustments recognized by OPM, are
  market price rates. aPM regulations refer to a market price rate in conjunction with the rates
  offered to an SSSG. If it is found that the FEHBP was charged rates that exceeded the market
  price (i.e., the best rate offered to an SSSG), a condition of defective pricing exists, requiring
  a downward adjustment of the FEHBP premiums to the equivalent market price.

  During the scope of our audit, the Plan contracted with physician hospital organization (PHD)
  providers to deliver covered services to its members. Many of these PHO contracts were
  capitated, meaning the Plan paid the PHO a fixed per-member-per-month (PMPM) amount for
  each member selecting a PHD physician. The PHO assumes the risk of incurring medical
  expenses above the capitation level. The Plan retains a certain percentage of group premiums
  to cover administrative expenses.

  In developing group premium rates, the Plan uses a capitation-based Adjusted Community
  Rating (ACR) methodology. This methodology compares group-specific capitation expense
  with actual PHD medical claims expense to determine the required change in the PHD
  capitation at a group's renewal. However, this reguired capitation increase/decrease was only
  used as a negotiating tool with its PHD. A group's actual renewal rate is based on the end
  results of the Plan's negotiated capitation increase/decrease. This method of setting a group's
  renewal rate is subjective and arbitrary. In order to determine whether the FEHBP received a
  market price rate, we used the required capitation increase/decrease as our basis for evaluating
  each groups' rates in each year of our audit. Further, pharmacy benefits are rated using actual
  claims expense. Lastly, special benefits, such as family planning, vision, mental health and
  substance abuse, Healthy Allies, and dental are rated using a flat-fee PMPM capitation.



 We agree with the Plan's selection o f _ and                                  as the
 SSSGs for contract ear 2005. Our anal sis of the rates charged to the SSSGs shows that
 ~or                                               eceived a discount.


                                                 5
percent. We also found that the  $.
The Plan originally applied a negotiated capitation increase ofllpercent to the FEHBP's
current capitation rate. However, we found that the required capitation increase was.
                                       PMPM mental health and substance abuse (MHSA)
capitation rate used by the Plan should actually have been ~ PMPM. Additionally, the
family planning capitation rate of ~ PMPM was not fully supported. We reduced it to the
filed rate of SIIIIPMPM. Finally, we determined that the Plan overcharged the retention
portion ofthe FEHBP dental rate.

 We re-developed the FEHBP's rates by correcting the above noted exceptions. A comparison
 of our audited line 5 rates to the Plan's proposed rates shows that the FEHBP was overcharged
 $196,932 in 2005 (see Exhibit B).



We agree with the Plan's selection of                   a n d _ as the SSSGs for
contract year 2007. Our analysis of the rates charged to the SSSGs shows that _
_         received a"percent discount, which was not applied to the F E H B P . _
did not receive a discount.

 For                     the Plan originally applied a negotiated capitation increase o f .


 Plan should actually have been $_
 percent to the current capitation rate. However, we found that the required capitation increase
 was .percent. We also found that the $_PMPM MHSA capitation rate used by the
                                         PMPM. Additionally, the ~PMPM family planning
 capitation rate used by the Plan was unsupported. We reduced it to the actual filed rate of
 $.PMPM. These exceptions resulted in                                      II
                                                                  receiving a      percent
 discount. .

  For the FEHBP, the Plan originally applied a negotiated capitation increase of. percent to

. the current capitation rate. However, we found that the required capitation increase was.

 ·percent. We also found that the ~PMPM MHSA capitation rate used by the Plan should

  actually have been $.PMPM. Additionally, the ~MPM family planning capitation

  rate used by the Plan was unsupported. We reduced it to the actual filed rate of ~PMPM.
  Finally, we determined that the Plan overcharged the retention portion of the FEHBP dental
  rate.

We re-developed the FEHBP's rates by correcting the above noted exceptions and applying
the. percent                      discount. A comparison of our audited line 5 rates to
the Plan's proposed rates shows that the FEHBP was overcharged $185,856 in 2007 (see
Exhibit B).      .

Recommendation 1

After receiving the draft report, the.Plan returned $382,788 to the FEHBP for defective
pricing in contract years 2005 and 2007. Since we verified that the Plan returned the total
questioned costs to the FEHBP, no further action is required.


                                              6
2. Lost Investment Income                                                                   $57,035

  In accordance with FEHBP regulations and the contract between OPM and the Plan, the
  FEHBP is entitled to recover lost investment income on the defective pricing findings in
  contract years 2005 and 2007. We determined that the FEHBP is due $57,035 for lost
  investment income, calculated through April 30, 2009.

  FEHBAR 1652.215-70 provides that, if any rate established in connection with the FEHBP
  contract was increased because the carrier furnished cost or pricing data that was not
  complete, accurate, or current as certified in its Certificate of Accurate Pricing, the rate shall
  be reduced by the amount of the overcharge caused by the defective data. In addition, when
  the rates are reduced due to defective pricing, the regulation states that the government is
  entitled to a refund and simple interest on the amount of the overcharge from the date the
  overcharge was paid to the carrier until the overcharge is liquidated.

  Our calculation of lost investment income is based on the United States Department of the
  Treasury's semiannual cost of capital rates.

  Recommendation 2

  After receiving the draft report, the Plan returned $57,035 to the FEHBP for lost investment
  income, calculated through April 30,2009. Since we verified that the Plan returned the total
  lost investment income amount to the FEHBP, no further action is required.




                                                  7

              IV. MAJOR CONTRIBUTORS TO THIS REPORT


Community-Rated Audits Group
                •
                        Auditor-in-Charge

                      Staff Auditor

                  Staff Auditor


                     Chief

                 Senior Team Leader




                                            8

                                                Exhibit A


                   Advantage Health Solutions
                  Summary of Questioned Costs

Defective Pricing Questioned Costs:

      Contract Year 2005                            $196,932
      Contract Year 2007                            $185,856

Total Defective Pricing Questioned Costs            $382,788·

Lost Investment Income                               $57,035

Total Questioned Costs                              $439,823
                                                                Exhibit B


                           Advantage Health Solutions

                        Defective Pricing Questioned Costs



      200S Contract Year
                                           Single    Family
   Plan's Proposed Rates
   Audited Rates
   Biweekly Overcharge
   To Annualize:
   x March 31, 2005 Headcount
   x Pay Periods
                                           •- ••26         26
   Subtotal·                               $51,145   $145,787
   Amount Due FEHBP in 2005                                          $196,932

      2007 Contract Year
                                           Single    Family
    Plan's Proposed Rates
    Audited Rates
    Biweekly Overcharge
    To Annualize:
    x March 31, 2007 Headcount
. --x Pay Periods
                                           •- ••26         26
    Subtotal                               $62,704   $123,152
    Amount Due FEHBP in 2007                                         $185,856



Total Defective Pricing Questioned Costs                             $382.788
                                                                                                             ExbibitC



                                                   Advantage Health Solutions

                                                    Lost Investment Income



  Year
                                     2005          2006         2007         ··2008   4/30/2009                  Total
                                                                                                                    ~

Audit Findings:


Defective Pricing                       $196,932            $0     $185,856            $0          $0            $382,788


                 Totals (per year):
    $196,932            $0     $185,856            $0          $0            $382,788
                Cumulative Totals:
     $196,932      $196,932     $382,788      $382,788    $382,788            $382,788

     Average Annual Interest Rate:
       4.375%       5.4375%      5.5000%       4.9375%     5.6250%

   Interest on Prior Years Findings:
        $0         $10,708     $10,831       $18,900      $7,177              $47,616

             Current Years Interest:
     $4,308             $0      $5,11 1           $0          $0               $9,419

          Total Cumulative Interest
      $4,308       $10,708      $15,942       $18,900      $7,177    I        $57,035
           Through April 30, 2009

                                                                                                                                       Appendix

                                                                  2009 APR 2I PI~ 2: 28

      ADVANTAGE

...rising above the serviceyou
                         ,     expect,..



     April 2, 2009




     Chief, Community-Rated Audits Group

     U.S. Office of Personnel Management

     Office of the Inspector General

     1900 E Streets, NW

     Room 6400

     Washington, D.C. 20415-1100



     Dear_:

     ADVANTAGE Health Solutions has received the draft report dated March 3, 2009, detailing the results of
     FEHBP, audit forcontract ye~rs20o.3 tlar:cugh 2008. After reviewing the draft report and the details of
     the .a~dit findings;'A.,DVANTAGE:_ilgrees with the aPM and its findings for contract year 2005 of $196,132
     and for contract year 2007 of $185,856. ADVANTAGE is prepared to submit payment to the aPM in the
     amount of the audit findings for defective pricing in years 2005 and 2007 plus the lost investment
     income of $49,858.

     AOVANTAG~              wishes to submit payment promptly, please provide instructions as to where payment
     s~i?'::i1~'be sent,        ,;...;

     Sincerely,


  ?~u+).~·
     Jennifer Ponski

     ChieffinancialOfficer

     ADVANTA~~ Health' Solutions                                       . i _... j   , • I, ' _.   ;.   ''>~' ~   :   ,-~-,,:) :'        i _~ .




                                               ADVANTAGE Health Solutions, Inc. SM
                                                                                                                                   l

            ,   .',c   I·
                                         ..
                                                     9045 River Road, Suite 200
                                                     Indianapolis, Indiana 46240                                       I C·
                                            ·1·877 -901-2237 I www.advantageplan.com